Multinational giants tame the wilds of emerging markets

RachelKoning Beals

CHICAGO (MarketWatch) — Large multinationals offer an investment avenue to emerging markets that proponents argue has staying power for years to come.

These companies are the world’s “global gorillas,” beating their chest for investor attention that’s been distracted by developed world problems at the expense of emerging market opportunities.

These behemoths boast all-weather management skills and sizable workforces. But don’t limit yourself to companies with established-market footholds, longevity and time-tested brands — or even the M&A flurry that’s taken over global consumer giants.

This emerging-market theme is about being nimble despite girth. It’s about reach, a willingness to look beyond China, India and Brazil (although not to ignore them) to Vietnam, Malaysia, the Philippines, and parts of Africa where cappuccino-craving and smart phone-dialing consumers are queuing up, or will be soon enough.

Destinations operating below this level of consumerism first need infrastructure, food innovation, and mobile bandwidth. In other words, more potential stock opportunities.

“It’s the end of the world as we know it, but certainly not the end of the world. We’re in a new world that encompasses globalization, changing demographics, and technology,” said David Darst, Morgan Stanley Wealth Management’s chief investment strategist.

“So ride the demographic wind. Let it push you rather than fight you.” Darst and his Morgan Stanley Smith Barney colleagues put “global gorillas” on their 2013 list of trends to watch, in part because emerging markets are expected to generate about 80% of global growth this year, he said.

Maps and goals

For sure, some companies are loosening the fiscal belt. Their pain period is over and they’re thinking growth again. That’s exciting. But don’t go wild over growth without applying the same sniff test you’d give any big company. Is management sound? If the company pays a dividend, is there yield growth? That’s why select stock picking among the healthiest multinationals can offset global economic uncertainty.

Below are a handful of themes and investment ideas that might coax you out of the monkey house and into the wild with the global gorillas. Mind the risks, too.

Few surprises here. The global gorillas are essentially the S&P Global 100 Index and the best way for individual investor exposure is iShares S&P Global 100 ETF
IOO, -1.35%
. The index does give greater weight to energy and financials. Some of its biggest holdings include: Exxon Mobil Corp.
XOM, -1.29%
, General Electric Co.
GE, -1.68%
, and U.S.-listed shares of Nestlé S.A.
NSRGY, -0.74%
and HSBC Holdings PLC
US:HBC
. Vanguard’s Total World Stock Index ETF
VT, -1.05%
competes in the same space.

Some big companies are already putting more resources in the emerging corners of the globe, where population and growth are beckoning. German cement-maker Putzmeister Holding, for example, has closed its Southern European plants and is building plants in Turkey and Brazil. And last year, Mondelez International Inc.
MDLZ, -1.94%
formerly part of Kraft, bought U.K.’s Cadbury for, among other reasons, that multinational’s reach in many former British colonies.

Some global gorillas are moving to capture emerging healthier lifestyles. Nestlé, for example, has boosted its food portfolio with traditional fare but last year acquired Pfizer Inc.’s nutrition business in a bet on a better-eating world.

Technology of course is one of the global themes few can argue against. As competition heats up for lower-cost smartphones, therein lies opportunity for both manufacturers and stock investors. For instance, Samsung, in pricing its smartphone below that of Apple Inc.
AAPL, -1.53%
and other rivals, may easily find loyalty among emerging market buyers whose incomes are rising but not on levels matching the developed world. That’s one example of nimble product variety and competitive pricing that will prove key to gaining market share in these still fledgling consumer markets.

‘Emerging market-lite’

Of course, there’s the downside.

Emerging-market growth is a long-term story, and as an investment may not be for those with weak constitutions or especially short-term horizons.

Investing in developing countries through multinationals is also a tack that some may call “emerging market-lite” — not really offering pure diversification away from developing markets.

China is also an unknown. As China transforms into a developed market, its relationship with Japan and other Asian neighbors will significantly impact the economic health of the emerging region. There’s room for improvement.

Multinationals also face tax challenges to their operations. Europe and Australian lawmakers, for example, are working to toughen the tax collection for U.S. multinationals selling goods and services in these locales.

As more markets open to products from abroad, it becomes more difficult to determine the tax liability of multinational companies. International agreements generally state that commerce should be taxed in the physical location where profit-making activity occurs, not necessarily where a customer lives or where a transaction takes place. Add dozens of emerging markets in the mix and this gets more complicated.

Emerging markets landed on other 2013 lists, including that of political consultancy Eurasia Group’s Ian Bremmer, who ranks these regions as one of his biggest risks investors face this year. He says investors may be so hungry for a good growth story they’re not giving enough credence to unequal political stability of emerging countries. He urges due diligence country-by-country rather than regional analysis.

Moreover, is the global economy really in the clear? Many European and U.S. companies are still deleveraging from the credit crisis of 2008. Central banks will wean consumers off ultra-loose monetary policy over the coming few years, potentially taming widespread global demand.

“If you don’t like energy or financials this year, a play on the S&P Global 100 might underperform,” Darst says. “But if you believe like I do that geopolitics is shifting to ‘geonomics,’ and that means developed countries have no choice but to support global (company) champions expanding in emerging markets, then you’re really getting some long-term prospects here.”

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